FDIC’s Norton Wants to Revise Basel III Leverage for Banks

U.S. banks should have to meet a stricter leverage ratio than that outlined in the Basel III international agreement, said Jeremiah Norton, a board member of the Federal Deposit Insurance Corp.

The regulatory agencies considering capital rules, including the FDIC, Office of the Comptroller of the Currency and Federal Reserve, should consider minimum leverage ratios based on tangible common equity against bank assets not weighted for risk, Norton said in a speech today in Orlando, Florida. The ratio should be higher than the earlier Basel III proposal for the Tier 1 capital ratio, he said.

“There is growing empirical evidence that a leverage ratio based on total assets is a better predictor of bank distress than a risk-based capital ratio,” as outlined in the Basel proposal, Norton said.

Fellow Republican board member Thomas Hoenig had previously advocated scrapping the Basel approach and simplifying the banks’ leverage ratios, calling for a rule based on the ratio of tangible equity to tangible assets.

A Basel III rule proposed by the U.S. regulators in June called for U.S. banks to maintain a core capital buffer of at least 7 percent of bank assets adjusted by their potential risks.

Unfinished Rules

As the U.S. banking regulators continue working to finish the Basel III rules, two of the five FDIC board members are now on the record against the fundamental approach adopted by the 27-nation Basel Committee on Banking Supervision. The rules are meant to to strengthen banks enough that they’ll more easily weather threats such as those faced during the 2008 global credit crisis.

“We should learn from past experience and turn our attention from using a capital rule that gives what in the end is a false sense of security to one that is effective because of its simplicity, clarity, and enforceability,” Hoenig said in a November speech in New York.

Most of the countries signing on to the accord missed the Jan. 1 implementation date, including the U.S., whose banking regulators said in November that U.S. institutions wouldn’t have to meet that deadline. The agencies didn’t offer a replacement date, saying in a statement that they are working “as expeditiously as possible.”

Norton, who has worked as a banker at JPMorgan Chase & Co. and in the Treasury Department under Henry Paulson, said that because “other countries may not follow” if the U.S. saddles its banks with a different regime, the effect of such a change on the banks’ competitiveness should be “considered carefully.”

Before it's here, it's on the Bloomberg Terminal.